With the passage of Senate Bill 483, Nevada business owners are in for substantial changes regarding how their businesses are taxed.
Effective this month, the Nevada Revenue Plan increased certain existing business taxes and creates a brand new one. The purpose of this article is to highlight three business-specific tax changes.
Business license tax
Prior to the enactment of the Nevada Revenue Plan, for-profit entities could expect uniform state business license and annual list fees: $200 annually for the state business license and $125 for the annual list. Effective July 1, 2015, the annual cost of a state business license for a for-profit entity (LLC, limited partnership, limited-liability partnership, etc.) other than a corporation, is increased to $150. The cost of a state business license for a corporation is increased to $500. The annual list fee for all entities is increased by $25.
Prior to the Nevada Revenue Plan, employers other than financial institutions paid a payroll excise tax equal to 1.17 percent of the total wages paid to employees. This payroll tax was subject to a quarterly exemption of $85,000. Thus, employers only paid a 1.17 percent tax on the sum of employee wages exceeding $85,000 per quarter.
Effective July 1, the payroll tax percentage is increased to 1.475 percent and the threshold exemption is decreased to $50,000. This means that more Nevada businesses will inevitably be subject to the payroll tax and those businesses subject to the tax will pay an additional .305 percent on every dollar paid to employees over $50,000 per quarter.
While financial institutions will continue to pay a 2 percent payroll tax, the threshold exemption for the tax applicable to financial institutions has also been decreased to $50,000.
Finally, mining companies, which were formerly subject to the same percentage and threshold as other non-financial businesses, will now be subject to the same 2 percent tax and $50,000 threshold as financial institutions.
The Nevada Revenue Plan adds a completely new business tax called the “Commerce Tax,” which is a modified gross receipts tax on businesses whose annual taxable income exceeds $4 million. Businesses grossing over this amount are subject to varying percentages of taxation depending upon the type of business in which they are engaged.
The Nevada Revenue Plan divides Nevada’s businesses into 26 separate business categories. Each business category is assigned its own applicable tax percentage rate ranging from 0.051 percent to 0.331 percent. Because the Commerce Tax is a gross receipts tax rather than a net profit tax, the differing tax rates appear to be an attempt to apply the new tax fairly to businesses with varying levels of profit associated with their gross receipts.
For instance, business categories where much of the total gross receipts are presumed to be profit (such as services industries and real estate) are taxed at a higher rate. On the other hand, businesses perceived as having a majority of their profit offset by the cost of acquiring goods or materials (such as retail trade, wholesale trade, manufacturing and construction) are taxed at lower rates.
Although the Commerce Tax applies on a business’s gross revenue, the legislation specifically excludes the following from the definition of gross revenue: amounts realized from the sale or license of a business’s intellectual property; the value of cash discounts allowed to and taken by a business’s customers; the value of goods or services provided to a customer on a complimentary basis; amounts realized from various transactions exempt from taxation under the Internal Revenue Code; amounts indirectly realized from the reduction of an expense or deduction; the value of property or services donated to a tax-exempt charitable organization; and amounts that are not considered revenue under generally accepted accounting principles.
In addition to the specific statutory exclusions, the Commerce Tax provides 27 separate categories of gross revenue deductions. Many of these deductions are specific to individual business industries such as health care, insurance and mining. The non-industry-specific deductions include: pass-through revenue, interest income, dividends and distributions from corporations, and distributive or proportionate shares of receipts and income from a pass-through entity.
They also include bad debts expensed for the purposes of federal income taxation, returns and refunds to customers and net income from the ownership of certain passive entities.
Finally, after the first year of the Commerce Tax (July 1, 2015 - June 30, 2016), businesses will be permitted to apply a partial credit (50 percent) of their Commerce Tax liability against their payroll tax liability. However, the credit may only be applied against a business’s payroll tax liability in any of the four calendar quarters immediately following the end of the calendar year in which the Commerce Tax was paid.
The Nevada Revenue Plan will undoubtedly have a major impact on Nevada’s overall economy — initial revenue projections found that it would produce between $1.1 and $1.5 billion dollars of new tax revenue over the next two years.
The Nevada Revenue Plan was championed by Republican Governor Brian Sandoval and supported unanimously by Nevada’s Democratic Legislators. Future tweaks aside, it is likely here to stay. I highly recommend that all concerned business owners consult with their business counsel and tax accountants to ensure they are adequately prepared for all the numerous changes that come with the Nevada Revenue Plan.
Shay Wells is an associate with Woodburn and Wedge. His practice areas include corporate law, real property law, and commercial transactions. Contact him at firstname.lastname@example.org.